How to Start a Business With Your 401(k)
While many people would scoff at the notion of using 401(k) funds for anything other than retirement, for the entrepreneur who absolutely MUST get a business off the ground immediately, there is an option to use 401(k) funds to start a business.
There's a little known, but increasingly popular provision in the tax code referred to as the Rollover as Business Startup (ROBS). It allows someone to start up a new business venture with funds from an old 401(k) account without incurring the dreaded early withdrawal penalties meant to deter people from using their 401(k) accounts like piggy banks. Chances are, you might already have some retirement funds stashed in an IRA account as well. (See also: 4 Reasons Why a Roth IRA may be better than a 401(k))
There are various ways to structure the transaction, but if you engage an experienced and reputable accountant or tax attorney, they should be able to guide you through the recommended process for your particular situation. Given the potential complexities and tax liabilities if this isn't enacted properly, I haven't listed out step-by-step instructions. But it IS possible and legal, and thousands of Americans are doing it.
When Would Using 401(k) Funds to Start a Business Make Sense?
Tapping retirement funds for any endeavor requires careful consideration, but there are a number of plausible scenarios where one might actually be better off going the 401(k) funds route than other conventional means.
To Avoid Going Into Debt
If you're an entrepreneur who is going to pursue an idea no matter what, nothing will stop you, not even going into debt. So, rather than borrowing money at a high interest rate or using questionable means to gain access to capital (like peer lending or deferring payments from other mandatory sources) this might make more sense and keep you out of debt.
When You're Going in a New Direction
A common example in this economy might be someone who was laid off. Let's say you're a highly paid executive with a sizable 401(k) who was just laid off, and the odds of you finding work at a similar salary are quite low. Maybe it makes sense to take a new direction in life and start up a small business. With the right funding and opportunity, you may be able to parlay your experience and leadership into a better opportunity as a small business owner.
If You Have the Most Incredible Idea Ever
Of course, the history books are written by the victors, so we've all heard the proverbial stories about the entrepreneurs who mortgaged their homes and borrowed from friends and family to start businesses, and now they're multi-millionaires. This doesn't happen often, and most small businesses don't make the big-time. But if you have a unique business that really could take off and you don't have access to capital otherwise, this might be your best option.
A decision to raid your 401(k) shouldn't be taken lightly, but when opportunity knocks, Americans often answer the door. We're an entrepreneurial bunch. If the opportunity is right and you have other means to fund your retirement, this might just be the mechanism to make it happen.
Would you ever use 401(k) funds to start a business?